Tax-free savings accounts

In the 2008 budget, the Tories introduced the tax-free-savings account (TFSA). I’d heard of it, but didn’t read the details. Yesterday, Jessica and I were talking and what she said didn’t jibe with the little I heard so later in the day, I went off in search of answers.

I found them quite quickly. Search for “tax free savings account” with Google and the first hit is the 2008 budget page describing the TFSA.

Let me take a crack at describing it.

Imagine a bank account. You put money in and take it out as you please. Still with me? Okay, now imagine that there’s a $5000 limit on deposits. If you keep your balance below this amount, all the interest you earn will not be taxable. It’s that simple. The document doesn’t state whether the bank will prevent you from depositing more than your limit, but I can’t imagine they would. Rather, I suspect you will have to claim the interest earned on the excess as taxable income.

What makes this account so useful is that unlike an RRSP, if you withdraw from the account, you can deposit more later. That is, your contribution allotment is not ‘used up’ if you deposit and then withdraw money. You can deposit the money again later as long as you don’t exceed your maximum.

And what of the maximum? A grand total of $5000 isn’t a huge amount. Of course it isn’t, but the maximum increases by $5000 every year. The budget page isn’t clear about this but I assume that the $5000 limit isn’t for each account. It’s for each person. Also, the yearly increase is calculated as of January 1, 2009 rather than from when the account is opened. If these assumptions are wrong, please do correct me!

Right now I’ve got my head down paying off debt, but come the summer of 2009, the most serious of it will be cleared up. At that time I plan to open a TFSA and deposit a nice nest-egg over the following months. Then I will continue reducing my debt and begin making investments at the same time. Things will move forward nicely from there.

That’s right folks… for the first time in a very long time, I’ve got a plan. Further this is only the portion related to money, and only the beginning of it. Believe me when I say I’ve been thinking a lot about the future and if things go as I hope, my life will be a very different five years from now.

I can’t fracking wait!

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2 Comments

  1. Shawn
    Posted October 27, 2008 at 08:51 | Permalink

    But at what interest rate? With the way the Central bank is lowering the prime rate, getting .001% on a savings account is not going to make it worthwhile. Saving tax on 46 cents a year is not going to better my retirement. I just checked RBC and there is little to no info.

  2. Posted October 27, 2008 at 08:58 | Permalink

    Well, that’s up to the individual bank, but I believe ING Direct is offering 3% from day one. Not a *huge* amount, but it’s good considering you can get at your money at any time.

    To get you to go with them, they’ll sign you up for a regular savings account now and convert it to a TFSA on January 1, and give you 6% interest until that time to cover the tax you’ll have to pay…

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